Kenya plans first East Africa hedge fund for power

Kenya plans to create the region’s first hedge fund for keeping electricity prices stable following complaints by manufacturers and businesses over sharp fluctuations in power costs.

Energy principal secretary Joseph Njoroge said the proposed fund will cushion consumers against volatility in power bills caused by price changes when the country switches to expensive diesel-generated electricity during drought or plant repairs.

Consumers pay more for electricity during drought since the country is forced to increase use of expensive thermal power to compensate for a dip in hydropower production.

Power bills come loaded with a fuel cost charge, adjusted monthly, which is linked to the amount of power produced by diesel generators and injected into the national grid.

The fuel surcharge jumped to a 34-month high of Sh3.35 per kilowatt hour (kWh) in September from Sh2.85 a month earlier, translating to an extra consumer burden of Sh420 million in September. The surcharge remained unchanged last month at Sh3.35 per unit.

“We want to have minimal variations in power prices to make it easier for businesses to manage their costs, ensure stability and boost their competitiveness,” said Mr Njoroge.

“Businesses have been complaining about the price swings.” The proposed fund will be set up at the Treasury next year and managed by the Energy Regulatory Commission. The hedging tool will see the energy regulator pass by half the benefits of lower hydropower prices to consumers during heavy rains and increase the fuel levy by a similar margin should drought strike or during plant repairs.

“If there is a drop in fuel cost obligations by say Sh3 per unit due to increased hydropower, we will lower fuel cost charge in power bills by Sh1.50 instead of the whole Sh3 with the other half going to the fund,” said Mr Njoroge.

Hydropower costs about Sh3 per unit, seven times cheaper than thermal power. Kenya relies on a mix of hydropower, geothermal and thermal power.

The country has been keen to ramp up geothermal production to cut reliance on weather-dependent hydropower and expensive diesel generators.